Argentine Bonds Fall as Province Pays Dollar-Debt in Pesos

Oct. 9 (Bloomberg) -- Argentine government bonds fell on
concern holders of dollar-denominated debt will have to accept
pesos after the central bank denied Chaco province’s request to
buy the U.S. currency to make payments on local securities.

The extra yield investors demand to own Argentine
government dollar bonds instead of U.S. Treasuries rose 25 basis
points, or 0.25 percentage point, to 867 basis points at 4:52
p.m. in Buenos Aires, according to JPMorgan Chase & Co.’s EMBI
Global index. The jump was the biggest in the index after
Venezuelan debt. The cost of Argentine five-year credit-default
swaps soared 65 basis points to 978 basis points.

“It brings back concerns Argentina may pesofy debt
payments,” said Bret Rosen, a Latin America strategist at
Standard Chartered Bank in New York. “Even if right now it’s
just a small payment from Chaco, holders of government debt will
think ‘the same could happen to me.’”

Chaco said in a statement today that it wasn’t able to buy
the dollars needed to pay its debt due to “foreign-exchange
regulations,” forcing it to make the payment in pesos.

A central bank measure approved in July doesn’t allow for
issuers to buy dollars to make payments to local investors on
dollar-denominated bonds sold in Argentina, said a central bank
official who asked not to be identified in accordance with the
bank’s policy. Issuers can buy dollars to pay international
investors, he said, adding that all of Chaco’s debt is held by
local investors.

Torino Says Sell

The peso payment by Chalco is fueling investors’ concerns
that President Cristina Fernandez de Kirchner’s administration
is becoming increasingly unpredictable, said Boris Segura, a
strategist at Nomura Securities International Inc.

“Who is to say that the government does not make this a
precedent and extends it to other local law bonds,” Piedrahita
wrote in a report.

The yield spread between Argentine government bonds due
2017 sold under domestic law and similar maturity notes
protected by New York law touched a record in June when
speculation mounted that was going to convert foreign-currency
contracts into pesos.

Barclays Plc recommended buying Argentine government local
dollar bonds as the bank’s “perception of credit risk of local
law federal bonds has not changed,” according to a report e-mailed today.

In an effort to curb capital flight and increase the use of
pesos in the economy, Fernandez banned most foreign exchange
purchases, made insurance companies bring foreign investments
into the country and forced exporters to repatriate revenue.

The peso has weakened 8.7 percent this year in the official
market to 4.7113 per U.S. dollar. In the so-called blue-chip
swap, which investors use to acquire dollars by buying assets
locally in pesos and selling them abroad in the U.S. currency,
the peso has weakened 25 percent to 6.3739 per dollar.